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Analysing the forward premium anomaly using a Logistic Smooth Transition Regression model

  • Sofiane Amri

    ()

    (CEDERS)

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    Several researchers have suggested that exchange rates may be characterized by nonlinear behaviour. This paper examines these nonlinearities and asymetries and estimates a Logistic Transition Regression (LSTR) of Fama Regression with the Risk Adjusted Forward Premia as transition variable. Results confirm the existence of nonlinear dynamics in the relationship between spot exchange rate differential and the forward premium for all the currencies of the sample and for all maturities (three and six-month maturities). Results confirm the insight into the presence of speculation barriers and transaction costs in the foreign exchange rate market that would explain, at least partially, the forward premium anomaly.

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    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 6 (2008)
    Issue (Month): 26 ()
    Pages: 1-18

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    Handle: RePEc:ebl:ecbull:eb-08f30042
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    3. van Dijk, D.J.C. & Terasvirta, T. & Franses, Ph.H.B.F., 2000. "Smooth transition autoregressive models - A survey of recent developments," Econometric Institute Research Papers EI 2000-23/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    4. Skalin, Joakim, 1998. "Testing linearity against smooth transition autoregression using a parametric bootstrap," SSE/EFI Working Paper Series in Economics and Finance 276, Stockholm School of Economics, revised 13 Dec 1998.
    5. Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
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    7. Baillie, Richard T. & Kilic, Rehim, 2006. "Do asymmetric and nonlinear adjustments explain the forward premium anomaly?," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 22-47, February.
    8. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
    9. Giorgio Valente & H. L. Leon & Lucio Sarno, 2006. "Nonlinearity in Deviations From Uncovered Interest Parity; An Explanation of the Forward Bias Puzzle," IMF Working Papers 06/136, International Monetary Fund.
    10. Bansal, Ravi & Dahlquist, Magnus, 1999. "The Forward Premium Puzzle: Different Tales from Developed and Emerging Economies," CEPR Discussion Papers 2169, C.E.P.R. Discussion Papers.
    11. Clarida, Richard & Sarno, Lucio & Taylor, Mark P & Valente, Giorgio, 2005. "The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates," CEPR Discussion Papers 4835, C.E.P.R. Discussion Papers.
    12. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
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    14. Yangru Wu & Hua Zhang, 1996. "Asymmetry in forward exchange rate bias: A puzzling result," Economics Letters, Elsevier, vol. 50(3), pages 407-411, March.
    15. Scott Barnhart & Robert McNown & Myles Wallace, 2002. "Some answers to puzzles in testing unbiasedness in the foreign exchange market," Applied Financial Economics, Taylor & Francis Journals, vol. 12(10), pages 687-696.
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